Flinder Valve Case Study

1 January 2017

However, before May 2008, the U. S. began to experience better economic conditions, which provided FVC a better environment to introduce its new, hydraulic-controls system called the “widening gyre,” which can be used in the military industry. With this expensive program still under development, Bill Flinder realized the importance of merging with another company that was financially stable. Other factors contributed the negotiation. In addition to nearing retirement, Flinder also believe a merger with RSE would help the transition years for his employees.

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FVC and RSE should follow-through and complete the negotiation because one company’s strengths make up for the other’s weaknesses. Tom Eliot had recently proposed to the board of RSE to focus on diversification. FVC would help diversify RSE; they had the reputation of opening up opportunities for companies looking to diversify, plant capacity, management efficiency, financial resources, or to even counter the effect of a cyclical business. Also, FVC is in a position that would require financial stability.

In addition to the required funds for the “widening gyre” program, the increase in the consolidation trend posed as potential problem for FVC because it would give away the company’s competitive advantage. FVC is a small company and could be pushed out of the manufacturing market if their competition learns of their production process. It needs production know-how if it wants to remain as a strong competitor. RSE has those strengths. They are a low-cost producer with an unusual production knowledge, which would prevent competitors from learning their process through analysis and reverse engineering.

RSE is also financially stable and has a greater purchasing power, which is what FVC lacks. Through this merger, FVC could reduce their materials and in-process costs while gaining more access to the marketing and distribution network. In addition to the financial gains, Tom Eliot shows no intentions just acquiring FVC’s brand name. FVC’s management team is what attracted Eliot in the first place. If Bill Flinder is to merge with another company, why not merge with one that is run by a respected man who actually plans on preserving FVC and its employees?

After carefully analyzing the data given, we believe that FVC’s value is roughly $270 millions, including synergies. The company’s stand-alone equity value is more than $158 millions. The synergies that derive from this acquisition are extremely beneficial to both FVC and RSE. RSE’s purchasing power would help to reduce material costs for FVC. The acquisition would also bring in estimated tax savings of $2 millions the first year and $4 millions thereafter. RSE’s new project, CORE, is expected to improve and save in-process costs for FVC, making it more efficient and helping to increase the company’s bottom line.

Moreover, FVC could utilize RSE’s marketing power and strategies to advertise their new advanced hydraulic-controls system or “widening gyre”. Flinder believed that the “widening gyre” could generate $10 to $18 millions to the company if successfully developed. Both company’s products complement each other’s, therefore, providing the customers a wider selection of industrial components. Despite a decline in the industry, both companies were performing well. Once the acquisition is announced and negotiation is under way, stock price for both companies is also expected to increase.

RSE, a big and tough competitor in the industry, is going to be bigger, stronger, and gaining additional market shares. They prove their stability and growth with this acquisition. Investors are more likely to believe in their company’s value and in turn would lead to higher stock prices and more value for both companies. Flinder’s opening bid should range from $380 to $390 millions which will give him some room for negotiation. We feel that he should not go through with this acquisition if RSE’s offer is lower than $300 millions.

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